I rise to present the Union Budget for 2013-14.
It is exactly five years since I presented my last budget in February 2008. Much water has flown down the Cauvery since then, and I realise that the situation today is the exact opposite of what I thought it to be on that day. GDP growth is down, consumer price inflation is still in double-digits, the fiscal deficit is still very high and the current account deficit is clearly unsustainable.
With all humility, I would like to acknowledge that my reading of India’s growth prospects in 2008 turned out to be totally wrong.
In 2008, with considerable pride I mentioned that “the four years to 2007-08 have been the best years so far but, may I say with humility, that the best is yet to come.” I am afraid, I have to eat my words today, in even greater humility. The five years since then have turned out to be very difficult for the Indian economy, and we have to produce our best today in order to see that the economy does not sink further into a morass of despondency and pessimism.
While it would be easy to blame the global financial crisis and high oil prices for our troubles, I must admit that crises come and go, but it is the quality of our response to troubles that matter. We have flunked the test before, but we cannot flunk it again. The future of the Indian economy and the well-being of our 1.2 billion people is too important to be sacrificed on the altar of ego.
In order to correct past mistakes, it is first important to acknowledge them. So I will begin by explaining what went wrong from 2008 to now, and how I propose to begin setting things right with this budget and beyond.
One, we assumed in 2008 that 9-10 percent growth was our birthright. It turned out that we have to work hard for growth. In particular, spending our way out of crisis is not always the best way to revive growth after a global financial crisis.
Two, there can be no growth with high inflation. We know our social spending did a lot of good, including lift several millions out of poverty, but the resultant inflation is pulling some of them back into poverty while also making our spending on schemes like the Mahatma Gandhi Rural Employment Guarantee Scheme unsustainable. If the scheme does not create commensurate assets, the higher spending cannot result in higher rural productivity which is essential to pay for the scheme in future. We have to fix this scheme to obtain optimum benefits.
Three, our current account deficit, which has reached an all-time high of nearly 5 percent of GDP, is simply not acceptable. This has happened due to our failure to pass on the costs of higher global fuel prices to users in India, as a result of which domestic consumption soared, and people purchased diesel SUVs and used diesel inefficiently. Not passing on real cost increases to customers is a moral hazard we could ill afford. It ruined both central finances and our external deficits. We have begun correcting that, but much more needs to be done before we can say we are out of the woods.
Four, we cannot borrow our way to higher spending – whether from internal sources or from abroad. That way we are headed for the same future as Greece or Spain or Italy. We went down that road in 1991, and I would not like to go down in history as the Finance Minister who led the country to external bankruptcy.
It is with these explanations and acknowledgements of past mistakes I would like to present the Budget for 2013-14. Madam Speaker, I would like to outline the key fiscal and other objectives for the UPA government in this last full budget before the next general elections due in May 2014.
In many ways, the situation facing today is not very different from what we faced in 1991. The only difference is that we have more forex reserves now than at that time. This is a matter of both regret and hope. Regret, because we failed to learn the lessons of the 1980s which brought us to 1991; hope, because we know we faced the earlier crisis with resolute action. This time too I hope to do the same. Our esteemed Prime Minister was Finance Minister in 1991 under Narasimha Rao; I hope I will have the same support of the Prime Minister and the party President, Smt Sonia Gandhi, as I set out to correct the mistakes of the past nine years.
First, our export system is broke. Over the first 10 months of this year, we have seen exports crash and imports rising faster, leaving us with a huge trade deficit of over 10 percent of GDP. While recognising that exports will not revive till global growth recovers, we still have to fix our huge current account deficit (CAD). To give exports a sharp leg-up and give the system some shock-treatment, I propose to devalue the rupee to Rs 60 to the dollar from today. The Reserve Bank Governor will make a separate announcement to this effect on dollar purchases at this price, and the plans for shoring up dollar reserves.
Second, this devaluation will push up the cost of raw materials we use, especially imported oil. We are, therefore, raising the prices of diesel by Rs 5 a litre from tonight, and a further Rs 5 from July 2013. This will eliminate the diesel subsidy completely if global oil prices remain where they are. Since the hike in prices will mute domestic demand, we expect our import bills and current account deficits to come down. Over time, this will improve our dollar inflows, and take the rupee higher, and bring further relief on the inflation front. We have to face short-term inflation in order to bring more stability to prices in the long run.
Third, we have a problem in all our energy pricing, from oil to gas to power and coal. Starting immediately after this budget, we will be freeing prices of coal and gas in stages. We will also be bringing a separate legislation to end the monopoly of Coal India in coal mining and open up more areas for private and public sector energy exploration. The Cabinet Committee on Investment headed by the Prime Minister is expeditiously clearing all pending coal and other projects from an environmental angle with due safeguards - it is a one-time quick clearance - so that investment can quickly get off the ground.
The petroleum and coal ministers will be making separate announcements in this regard later today. The net result of all these changes will be to raise energy prices substantially, but in a year or two, we will see supplies rising as more supplies come on stream. We only need to note the example of the US, which has managed to achieve near energy self-sufficiency by opening up shale gas supplies. The US is no longer as dependent on Gulf oil as it was a decade ago; unfortunately, we are. Our policy has the medium-term goal of reducing oil imports to 50 percent by 2018 compared to 80 percent today.
Fourth, we are winding up all centrally-sponsored schemes and instead handing over the savings to states for use in their own social sector schemes. I know in the last budget my predecessor talked about the Food Security Bill and other such plans, but I find that the states are capable of doing the same job. They should know best where food security is really required. While Tamil Nadu has opposed our version of the Food Security Bill, Chhattisgarh has already gone ahead and implemented it.
The centre has over a 100 schemes, of which around 15 are major ones. These include the MNREGS, the Integrated Child Development Scheme, the National Health Mission, the JN National Urban Renewal Mission, the Sarva Siksha Abhiyan, the Mid-Day Meal scheme, the Indira Awaas Yojana, and others which collectively have an outlay of Rs 15 lakh crore in the 12th plan. That’s around Rs 3,00,000 crore every year.
What we propose to do is distribute our share of this funding of centrally-sponsored schemes to states for use in the relevant areas. We will only indicate the areas where the money should go to. With this move we will not only be striking a blow for federalism, but also ensure that the money is better spent on schemes that are designed from the ground up and not top-down.
Fifth, we are always grappling with the issue of bloating subsidies. With this budget, we are seeking to wean ourselves away from unnecessary subsidies. The changes in energy pricing will eliminate subsidies in fuel by the end of this financial year. That still leaves subsidies in fertiliser and food, the other big areas.
This is what we propose to do. The fertiliser subsidy was intended to be a benefit for small farmers, but it has ended up being a subsidy for the fertiliser industry. From this year onwards, we plan to eliminate the fertiliser subsidy altogether by freeing all prices, but this increase in fertiliser costs will be captured in higher food prices – where the subsidy bill will rise. Farmers will not be affected at all since their support prices will be adjusted to absorb the higher fertiliser prices. The Commission on Agricultural Costs and Prices will work out reasonable use rates for fertiliser in various crops and make appropriate recommendations on minimum support prices for the 10 most crucial crops. This decision will push up food subsidies in the short run, but will have two major benefits for the economy: a better fiscal deficit, and improved and balanced usage of various nutrients by Indian agriculturists. Balanced usage will have beneficial effects on agriculture, making the soil less vulnerable and improving farmers’ profits.
That leaves us with a food subsidy that could run into Rs 2,00,000 crore this year. We propose to restrict food subsidies only to those below the poverty line (BPL) in two years. Once Aadhaar is universal, we will identify the poor and restrict the subsidy to them. In the transitional phase, all ration and BPL card holders will continue to get subsidies as at present. We expect to cover the entire country with Aadhaar by end-2014, and the identification of BPL families will be completed by that time.
Once that is done, we will also offer the identified poor the option of receiving subsidies in kind as foodgrain or as direct cash transfers.
Subsidies in kerosene will also be given only to the poor, and direct cash transfers will be on offer here too.
Now, let me come to investment climate. We can’t revive the economy without boosting investment sentiment, but that is not a job for the budget alone to accomplish. What happens outside the budget is as important, but we will indicate the direction through this budget speech.
Madam Speaker, no country can hope to grow its GDP faster without serious efforts to cut red tape and unnecessary regulations. With this in mind, I am announcing the following reforms to boost investment and market sentiment.
FDI: Our approach to foreign direct investment in industry and services has been selective and sporadic. In future, we want to be clear that all foreign investment in welcome. Barring a small list of sensitive industries like defence, nuclear energy and high-technology, we are now opening up all industries to 51 percent FDI through the automatic route. There will be no need for FIPB clearance. Foreign investors will no longer look at our rules as some kind of lottery or hurdle race.
Deregulation: We are conscious that India can be built only by Indians. But two decades after our 1991 reforms, Indian industry is still complaining of red tape and delays in clearances from multiple authorities. In real estate, for example, a builder needs 57 approvals before he can start constructing. The World Bank says India ranks 132 in terms of ease of doing business.
We do not want to make life hell for our businessmen. We are, therefore, setting up a permanent Deregulation and Procedural Simplification Commission, headed by an industry veteran and not a bureaucrat, to vet all rules, procedures, and laws that impact the ease of doing business and keep reducing the paperwork and delays month-by-month. I invite every industry to take its problems to the commission, and I assure you that we will act on all suggestions within one month of their receipt. We have also requested NR Narayana Murthy to head this commission, and he will be given full freedom to make his recommendations. The task we have set for Mr Murthy is very simple but onerous: he has to get India’s ranking in terms of ease of doing business from 132 to under 100 in three years. In the long term, we want to be among the top 10 investment destinations not merely for reasons of demographic advantge, but ease of doing business.
Factors markets: In 1991, we opened up licensing and business's access to capital. However, we left two vital factors markets totally unreformed: labour and land. In a market-driven economy, business needs flexibility to employ labour depending on demand. In the absence of the freedom to hire and fire, we find the business is simply not hiring. We have seen jobless growth in our organised sector. Last year’s violence at Maruti shows one ugly consequence of our failure to reform labour laws, which forces industry to hire contract labour at low cost, leading to both exploitation of employees and poor quality job creation. In the labour laws we are now proposing, any management will be able to lay off workers with six months’ pay. But they also have to pay for six months of retraining for the laid off worker. We are additionally levying a 1 percent unemployment surcharge on corporate taxes to finance three years of unemployment allowance for fired workers. This is the most humane way to make our labour laws flexible and I invite our political opposition to make this a reality.
The Labour Minister will discuss the changes proposed at a separate briefing later today.
But we need an exit policy not only for labour, but management as well. Managements in some aviation companies, for example, have been broke for years, but they were funded by public sector banks and taxpayers. Bad companies must die if good companies have to survive.
I, therefore, propose to set up a new bankruptcy law modelled on America’s Chapter 11 under which any beleaguered management can seek temporary shelter, but they have to emerge from it either with their viability intact or be shut down. We want to set a time limit of three months for such revival packages to be worked out between lenders and companies, and a special legal authority to clear or reject the deals worked out. We are permanently winding up the Board for Industrial and Financial Reconstruction and replacing it a new entity to manage bankruptcies and potentially unviable entities. The Minister for Commerce and Industry will brief you later on the details.
Which brings me to another factor, land. Our land laws are the most archaic in the world, and so are our acquisition laws. We are undertaking on a war-footing the computerisation and registration of all property titles in India, and urge the states to use the same network, which comes free of cost to them. Existing computerised systems can also be plugged into our new system. Once this is done, anyone can check property titles at the click of a button for a small fee, and land can be freely bought and sold by anybody.
As for acquisitions, we have abandoned the Land Acquisition Bill and instead opted for a simple one where the key elements are the following: payment of full market price based on arms-length price discovery; sale by 50 percent of landowners for any public purpose project, big or small, will mean automatic approval by the rest and compulsory acquisition; land sellers will be given 25 percent economic equity in the developed project; and every family losing land will be trained and given at least one job, or rehabilitated under the supervision of a public-private entity which will have community representatives on it. With these changes, which we hope the states will also adopt, industry should find it easier to buy land for infrastructure, building factories and homes. A separate bill will be moved by the Rural Development Minister during the budget session to enable these changes.
b>Sound money: One of the reasons for rampant inflation is excess borrowing and monetisation of the fiscal deficit. We want to move away from this tendency of all governments to live beyond their means by not only sticking to the new Fiscal Responsibility and Budget Management Act but by mandating that if certain deficit limits are breached, there will be automatic cuts on all non-capital expenditures. On the external front, we plan to ensure that gold forms at least 15-20 percent of our total reserves – it's currently around 10 percent. This will not only give foreign investors confidence, but also prove that we mean business. In this context, we would like to withdraw the special import taxes on gold and have asked the Reserve Bank to allow banks to offer two-way quotes on gold, by both buying and selling gold. You can’t detach our citizens from their love of gold by making it difficult for them. Scarcity makes gold even more valuable than it should be.
However, I do believe that if gold is to be ultimately replaced by more productive investment avenues, we need to offer our citizens a real alternative that will at least beat inflation. To give the middle class an inflation-resistant savings instrument, the government of India will launch inflation-indexed bonds where the rate of interest, to be reset quarterly, will be the previous year’s average inflation rate plus 2 percent. Both the principal and interest rates will be indexed.
This brings me to taxation.
In my 2008 budget speech, I said: “Many people are surprised by the buoyancy in tax revenues, especially in direct taxes. I am not. I have always maintained that moderate and stable tax rates coupled with a tax administration that shows no fear or favour will bring high revenues to the exchequer.”
I still believe in this maxim, but revenues have not been buoyant for reasons that go beyond the taxpayer’s willingness to pay. The problems, of the loss of business confidence and related factors, I have addressed separately.
But I plan to look at taxpayer issues more holistically this year. The proposals in the Direct Taxes Code (DTC) have undergone a lot of change due to the lack of revenue buoyancy in recent years. However, we can’t have a tax system that changes year to year. I thus propose several changes which will be incorporated into the DTC, which will be legislated later this year.
Let me first come to personal tax.
The message of the budget is short-term austerity, long-term growth and stability.
In keeping with this goal, I may disappoint my middle class taxpayers by not offering any tax reliefs this year. We have to tighten belts, and by not raising tax exemption limits, more taxes will be collected from all of you.
But I promise a reward for this austerity next year. For the first time, I am breaking with tradition and am putting down the exemptions that will be applicable from next year through the Direct Taxes Code.
Given rising costs of living, I will be raising the tax-free income limit to Rs 3,00,000 (Rs 3 lakh per annum) for all Indians from fiscal year 2014-15 (AY 2015-16). There will be no separate limits for women or senior citizens, but since the limit has been raised for all substantially, everyone will benefit.
To promote saving, I propose to club all investments currently deductible from income – provident fund contributions, equity-linked savings schemes (ELSS), post office savings schemes, medical insurance, insurance premia, infrastructure bonds, interest payments on home loan EMIs, etc – under an omnibus Section 80 C with a total limit of Rs 3,00,000. In other words, if you want to take the whole Rs 3 lakh as deduction on home loan interest, you can. If you want to claim all of it as ELSS investment, you can. The choice is yours.
This means anyone earning up to Rs 6,00,000 per annum – and who invests half of it in various savings schemes – will be free from tax from next year.
For this year, I plan to focus on savings, not consumption.
Inflation is the scourge of fixed income groups. Since there is no chance that we can abolish inflation in the foreseeable future – and it may not even be advisable to have a zero-inflation economy – henceforth the tax slabs will be automatically indexed to inflation. Not entirely, but the tax-free bracket will be raised each year at the previous year’s average inflation rate minus 2 percent.
Before presenting the budget, I had raised the issue of whether the rich should pay more. I had also raised the question of inter-generational equity and the levy of estate duty on inherited estates. My own answer is yes, but many others said that the aim of tax policy should be to expand the taxpayer base and not merely get more from existing taxpayers.
I agree with both positions. I propose to get the rich to pay more by recognising that it is dividends and capital gains that contribute to their low tax status. So, I propose to shift the basis of taxation from companies to the receiver of dividends. Companies now pay 15 percent dividend distribution tax, plus cess on payouts. In future, they will pay less, and thus can be more generous with their payouts. But the rich will pay tax on the dividends they receive at their marginal rates of 30 percent plus surcharge and cess. In order to ensure that this does not result in evasion, I am making changes in the law to require companies to deduct tax at source. Those receiving more than Rs 5,000 annually in dividends will be taxed at the 30 percent marginal rate. Taxpayers falling outside the 30 percent bracket can submit a modified form 15G to companies to indicate which bracket they think they should be taxed at. They can also claim refunds through their tax returns.
I, however, propose to leave capital gains taxes unchanged for now because they can have a larger bearing on market sentiment.
About estate duty, I have thought about it at length and discussed the issue with experts. I am advised that the difficulties in collecting it may outweigh the amounts collected and cause needless taxpayer heartburn. Instead, I have a different idea for incentivising a voluntary use of private wealth for social purposes.
This budget will propose the creation of a new sort of Trust by the wealthy which will offer a one percent personal income-tax rebate for the wealthy for every 10 percent transfer of personal wealth to charitable trusts established for an approved list of acceptable purposes. There will be minimum threshold limits for this kind of charity. The purposes for which trust funds can be used include primary schooling, skill and career development, running food kitchens in specific high-poverty districts, provision of drinking water in remote areas, etc. These purposes will be changed from time to time, depending on our social challenges. The trusts will have representatives from government and NGOs, and will be subject to annual social audits to ensure that the money is used for the defined purposes. Rules in this regard will be separately announced by the Ministry of Company Affairs.
>On corporate taxes, I propose to make no changes here whatsoever.
b>As for indirect taxes, I propose only two changes. One for this year, and another for next year. I propose to hike excise and service taxes to 14 percent this year, which was the rate before the Lehman crisis. Between them, the hike in excise and service taxes will raise more revenues than I will lose in other concessions to individuals and companies. I, of course, do not expect even direct tax collections to fall since better compliance and economic buoyancy will improve my revenues.
With this done, we are ready to introduce the goods and services taxes from next year. I know many states are anxious about the potential loss of revenue. I believe they will gain, not lose, from a shift to GST. But to allay their fears completely, I propose to compensate them fully for any loss of revenue on account of GST in the first three years, after which we can review the scheme.
I hope they will now agree to introduce GST from next year and make the necessary investments in IT infrastructure this year.
Taking all my tax and non-tax proposals into account, I expect to reduce my fiscal deficit to 4.5 percent in 2013-14. I propose to bring it down steadily to 2 percent by 2018-19. The FRBM Act will be amended for this purpose with new targets. The revenue deficit will fall to zero two years before that.
The job of the finance minister begins not with the budget, but after it. I promise to be vigilant and make any changes needed in case my projections look like going wrong. I will not wait for the next budget to make amends.
One more break with tradition. I am not making any growth forecasts in the belief that if you do the right things, the right results will follow.
The Bhagavad Gita advises thus:
"Karmanye Vadhikaraste Ma Phaleshu Kadachana,
Ma Karma Phala Hetur Bhurmatey Sangostva Akarmani"
(You have the right to perform your actions, but you are not entitled to the fruits of the actions. Do not let the fruit be the purpose of your actions, and therefore you won’t be attached to not doing your duty.)
I don't think I can go wrong with this advice. I have consciously tried not to make this a pre-election budget. I believe have done my duty to this country and the Indian economy.
And with that, Madam Speaker, I commend the budget to the House.